Sunday, August 9, 2009

OPPORTUNITY ROUND THE CORNER - INDIAN STOCK MARKETS

Found a quote on investor psychology in a blog "Just Nifty" by Illango which to me seems so very apt for common investors. Take a moment to mull over it.

"The reason is that a man may see straight and clearly and yet become impatient or doubtful when the market takes it time about doing as he figured it must do. That is why so many men in Wall Street, who are not at all in the sucker class, not even in the third grade, nevertheless lose money. The market does not beat them. They beat themselves, because though they have brains they cannot sit tight." Quote by Jesse Livermore.

Now the time is round the corner for all those who have been sitting tight after having emptied their portfolio at Nifty level of 4600. Before we move any further I guess I have some explaining to do with the help of Dow Theory. For the benefit of uninitiated to this particular school of thought, I shall be somewhat explicit in my explanation. But I would also beg some patience from those who are already familiar to the theory.

Markets, like everything else in life, goes around in cycles. There can never be eternal ups and by the same count there cannot also be eternal downs. It means that after a Bull run there will be Bear market and vice-versa. But the most important thing for long term survival is to be able to spot a long term opportunity when it presents itself. The idea is to make an informed decision , weighing various pros and cons, and spot the opportunity as it presents itself.

Dow Theory, which has stood the test of time for over 100 years, suggests that the primary trend has three phases. Bull run begins with Phase 1 where there is Revival of Confidence, then after some correction there is Phase 2 where in there is Improvement in Corporate Earnings, then some more correction, and finally there is Phase 3 or the Euphoric Phase. Euphoric Phase has maximum speculation and inflation of prices. At the culmination of Bull run there will be Bear market with three phases. The 3rd and final phase of Bear run will be characterised by panic selling. As Bear market draws the last blood on the street and completes its cycle, the 1st phase of Bull run starts. And market limps back to life, licking its wounds.

We have just witnessed Revival of Confidence since March 2009. If we consider that as 1st phase of Bull run, we may now expect some decent correction before the 2nd phase of Bull run takes over. For any investor, 2nd phase of Bull run is always the most rewarding phase because it generally is the largest phase in terms of duration and rise in prices. It is always advisable to enter market in the 2nd phase of Bull run since by then there is enough confirmation of intent of the market and correct identification of the Bull run. In contrast the 1st phase of Bull run is always difficult to identify since it could as well be a pullback rally in existing Bear market wherein one can so easily get trapped. Remember that Bull run starts just as the Bear run finishes without any formal and elaborate announcements. You can only identify the first phase of Bull run in retrospect.

Finally the question that begs an answer is this - "what would be a decent correction in Indian markets so that an investor can correctly join the bandwagon for riding the 2nd phase of the current Bull run". Here one can take the help of Fibonacci retracement levels of 38.2% or 61.8% or simply go by 50% correction. Take your pick and invest with gay abandon because 2nd phase of Bull run is round the corner. If you ask me I would suggest that 3500 in Nifty is a safe point to go long. Happy Investing!